Oil pushed higher as investors tried to figure out whether a possible release of strategic crude reserves by the U.S. and its allies could do much to curb a dramatic surge in prices following Russia’s invasion of Ukraine.
Futures in New York rose almost 2% in Asia after advancing 4.5% on Monday as sanctions on Russia rippled through the market. A release of 60 million barrels is being considered by the U.S. and others, according to people familiar, which would be equivalent to less than six days of Russian output. The International Energy Agency, meanwhile, will hold an extraordinary ministerial meeting on Tuesday, Executive Director Fatih Birol said on Twitter.
The American oil benchmark has whipsawed around $100 a barrel since the invasion last week as the market digested the impact of mounting financial penalties against Russia. Brent in London rallied above $105 at one point, with Goldman Sachs Group Inc. saying demand destruction is the only thing that can stop oil shooting even higher. The bank has raised it’s one-month forecast for the global crude benchmark to $115 with significant upside risk.
The invasion of Ukraine has upended commodity markets from oil to gas and wheat, increasing inflationary pressure on governments seeking to encourage economic growth after the pandemic. While the U.S. and Europe have so far stopped short of imposing sanctions directly on Russian commodities, the trade in those raw materials is seizing up as banks pull financing and shipping costs surge. Russia is the world’s third-biggest oil producer and the second-most influential member of the OPEC+ alliance behind Saudi Arabia.
The turmoil sparked by the invasion is likely to make the task of balancing the tightening market harder for OPEC+, which meets Wednesday to discuss output policy. Delegates said the cartel will probably stick to its plan of only gradually increasing supply. The group’s Joint Technical Committee, which analyzes the market on behalf of ministers, meets later on Tuesday.
"Any SPR release would only be a short term solution, particularly if Russian oil flows were significantly disrupted,” said Warren Patterson, Singapore-based head of commodities strategy at ING Groep NV. "I do not believe the market is pricing in a significant impact to Russian oil exports, and so that leaves a lot of upside risk if the situation deteriorates further.”
Talks on the coordinated release are currently focused on tapping 30 million barrels from the U.S. Strategic Petroleum Reserve and an equivalent amount from a group of other countries, the people said. No decisions have been made and the discussions could continue for several more days, they said. Prior to the pandemic, global oil consumption was about 100 million barrels a day.
The White House has said that directly sanctioning Russia commodities is on the table and Goldman Sachs said markets need to reflect this risk. Oil trader Pierre Andurand estimated about 3 million barrels a day of crude would be lost if this happened, assuming China would take an additional 1 million barrels a day. This is an amount the world can absorb to some extent, given reserves releases and more output from the Persian Gulf, he told Bloomberg Television.
Brent remains deep in backwardation, a market structure where prompt barrels command higher prices than later-dated cargoes, indicating nervousness over tightening supply. The benchmark’s prompt timespread was $3.07 a barrel in backwardation, compared with $1.39 at the start of last month.
The invasion of Ukraine is also prompting oil companies to wind up their operations in Russia. Shell Plc followed BP Plc in announcing plans to cut ties with Russian partners, leaving Exxon Mobil Corp. and France’s TotalEnergies SE as the only remaining supermajors with significant drilling operations there.
The caution around Russian crude may present an opportunity for China, however. Chinese companies are expected to snap up discounted Russian oil should sanctions deter other buyers, traders said, potentially repeating a pattern seen when Iran and Venezuela were hit by U.S. curbs.
